For years, political deadlock has stymied pressing reforms from
health care to taxes to entitlements. Congressman Paul Ryan (R-WI),
ranking member of the House Budget Committee, has attempted to
break the deadlock, challenging members of both parties to take
these serious issues seriously. Leading by example, Ryan has
released a collection of bold, comprehensive, and sweeping reforms
covering a broad spectrum of issues.[1]

The centerpiece of Ryan's proposal is major reforms in Social
Security, Medicare, and Medicaid. The details of these proposals
are important, and some are presented briefly below. Far more
important, however, is that the nation now has before it
substantive proposals that address its most pressing fiscal policy
issues.

Members of the majority party in Congress, in leadership and
out, including the chairmen of all the major committees of
jurisdiction, have expressed deep concerns over these important yet
unsustainable entitlement programs. The majority should respond
constructively to Congressman Ryan's proposals and engage on the
issues. It is long past time for them to act, either by moving the
Ryan proposals through their respective committees toward ultimate
passage or by putting forward their own ideas in concrete terms. To
quote Walter Mondale's famous query to Senator Gary Hart, Ladies
and gentlemen of the majority, "Where's the beef?"

The Need for Reform and Roads Not Taken

The big three federal entitlement programs of Social Security,
Medicare, and Medicaid are vital to seniors and the poor, but they
are also unsustainable in their current forms. If left unchecked,
growth in these programs means that federal spending, excluding
interest, would increase from 18 percent of gross domestic product
(GDP) today to 28 percent in 2050 and continue to increase from
there. While growth in all three programs would be
transformational, Medicare grows particularly rapidly. In fact, by
2050, Medicare spending alone as a percent of GDP would be far
greater than spending on all three entitlements is today.

The projected growth of federal entitlements dictates that
something fundamental in America is about to change. Allowing these
programs to continue on their current course would necessitate a
change elsewhere: specifically, a vast shift of the nation's
resources from working families to seniors. Yet such an "autopilot"
scenario still demands that entitlement spending be financed either
by issuing debt or raising taxes. Recent correspondence from
Congressional Budget Office (CBO) Director Peter Orszag to
Congressman Ryan speaks to this issue.[2]

According to the CBO, if the growth in entitlements were funded
by issuing debt, then the debt-to-GDP ratio would rise from about
37 percent today to more than 290 percent in 2050. As Orszag's
letter notes, that would be "a large figure by any standard." The
consequence of such an increase, according to CBO analysis using a
textbook growth model, is that per capita income[3] would stop growing
before contracting in the late 2040s. The letter goes on to note
that "beyond 2060, projected deficits would become so large and
unsustainable that the model cannot calculate their effects."
Additionally, the CBO believes that "such estimates greatly
understate the potential loss to economic growth under this
scenario."

In short, issuing debt to cover the explosion in entitlement
spending would be economically catastrophic.

Rather than issuing debt, the growth in entitlements could be
funded entirely with higher taxes. According to the CBO, tax rates
would then nearly double from current levels. For example, the 10
percent rate would have to increase to 19 percent, and the top
current rates on individuals and corporations of 35 percent would
have to increase to 66 percent. And those rates apply only if there
is no consequent change in the path of economic growth from higher
taxes.

In contrast, the CBO estimates that per capita income would drop
between 5 percent and 20 percent if those rates applied. Such a
decrease in income would mean that tax rates would have to be
significantly higher still, further shrinking the economy. The
inevitable conclusion is that raising taxes to pay for the growth
in entitlements is also out of the question.

If debt finance would be catastrophic and raising taxes to cover
entitlements is also out of the question, then slowing the growth
in entitlement spending is the only viable option for reforming
Social Security, Medicare, and Medicaid.

The Ryan Entitlements Road Map

The Ryan road map includes comprehensive reforms in Social
Security, Medicare, and Medicaid that would bring each of these
programs back under control. The key elements of each are listed
below.

Social Security

Eligibility Age: Under current law, the
eligibility age for Social Security benefits increases gradually,
reaching age 67 by 2026. Congressman Ryan proposes to accelerate
that process by one year and to index the eligibility age
thereafter according to changes in life expectancy.

Progressive Price Indexing of Initial Benefits
(PPI): Under current law, initial benefits are determined
by an individual worker's wage history, with wages earned in a
given year indexed for nominal wage growth, a rate that
traditionally has far exceeded the growth in the price level. For
those now under 54 years of age, progressive indexing indexes
worker history for higher-income earners according to the rate of
price inflation.

Personal Accounts: Beginning in 2011, workers
would have the option of dedicating portions of their Social
Security payroll taxes to personal accounts, phasing in the portion
that may be directed to these accounts up to 5.1 percent.

Medicare

Medicare reform is inextricably linked to reforms in the health
care system generally. The Ryan plan includes important health care
reforms such as a new $2,500 single ($5,000 for couples) refundable
tax credit available after purchase of a private health insurance
plan. This and other reforms in the private health care system
would ultimately make reforming Medicare easier and provide a
seamless transition to Medicare for newly eligible seniors.

Standard Medicare Payment: Beginning January
1, 2019, Medicare beneficiaries would participate in an entirely
new program. Under the new program, beneficiaries enrolled in a
private health care plan would receive $9,500 annually in premium
support payments, to be applied to the cost of their individually
purchased health care plan.

The payment amount would be indexed to reflect health care
inflation, and

The payment would be made directly to the Medicare-approved
insurance company, with any remaining balance returning to the
beneficiary as a refund.

Income Relating: Premium support payments for
beneficiaries with incomes above $80,000 ($160,000 for couples)
would decline as their incomes rise, but even couples with incomes
above $400,000 would receive $2,850 to help cover insurance
premiums.

Low-Income Beneficiaries: Low-income
beneficiaries would receive the additional benefit of medical
savings accounts (MSAs) funded by Medicare. The amount of funding
each year would be set equal to the average deductible of a
high-deductible health plan.

Allow states to choose whether to continue
their current Medicaid programs under a block grant program or
allow their respective Medicaid populations to participate in the
health insurance tax credit program;

Retain current Medicaid for states' long-term
and disabled populations; and

Make the SCHIP population eligible for the
health insurance tax credit.

Conclusion

The Ryan road map for America is a comprehensive blueprint for
fundamental reforms in a wide spectrum of federal programs. For all
the details, of which there are many, two aspects of this program
stand out:

Second, the nation now awaits and deserves to hear from
the congressional majority party about its ideas. Talk of problems
is not enough. Promising proposals is not enough. It's time for all
sides to join with Congressman Ryan and get serious about
entitlement reform.

J. D. Foster, Ph.D.,
is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
in the Thomas A. Roe Institute for Economic Policy Studies at The
Heritage Foundation.

[3] The
letter refers specifically to per capita gross national product, a
concept related to the more common gross domestic product. The
mirror image of GNP is gross national income, which is the total
income earned by U.S. residents through productive activities.